WBG Energy Sector Directions and Challenges of Energy Subsidy Reform Charles Feinstein, Director Energy & Extractives Global Practice
E NERGY S ECTOR D IRECTIONS P APER , 2013 “Towards a Sustainable Energy Future for All”
O BJECTIVE Support client countries in securing the affordable, reliable, and sustainable energy supply needed to end poverty and build shared prosperity. • Closely aligned with SE4ALL initiative 3
W HAT ’ S N EW ? • From projects to sector wide planning • Scale-up of engagement in natural gas • Unambiguous position on coal projects • More nuanced position on renewable energy • Clear priority to access in low access countries 4
H YDROPOWER • Given – 90% (70%) of hydropower potential in SSA (SAR) remains unexploited – Hydropower is largest source of affordable renewable energy in many energy markets – Delivers adaptation as well as mitigation benefits – Provides storage to balance other renewables • WBG firmly committed to responsible development of hydro – Including both large and small hydropower (no longer a distinction) – Including both run-of-river and reservoirs – Based on multi-purpose vision and informed by nexus – Environmentally and socially sustainable, including benefits-sharing with local communities 5
N ATURAL GAS • Because natural gas is – The fossil fuel with lowest carbon intensity, making it a useful transition fuel towards a low-emissions future – Well suited for both base load and peak load power – Well suited for complementing wind and solar • WBG will scale up engagement in natural gas – Policy and regulatory support, risk-mitigation instruments, IFC investments across the supply chain, gas flaring reduction through GGFR 6
C OAL • WBG will help identify alternatives to Greenfield coal power – Will provide financial support for greenfield coal power generation projects only in rare circumstances to meet basic energy needs in situations with no feasible alternatives to coal and no other sources of financing • WBG will consider supporting rehabilitation of existing coal plants to increase efficiency, subject to screening criteria • WBG will consider supporting greenfield coal with operating carbon capture 7
R ENEWABLE ENERGY • Foundations for renewable energy – Renewable Energy Resource Mapping – Transmission expansion • Continue to promote wind and solar – Distributed as well as grid – Economic particularly in small, isolated off-grid markets • Scale up geothermal – Low cost, base load, could be large scale • Make use of biogas – Clean household energy 8
F RAMEWORK TO G UIDE WBG F INANCE GHG EMISSIONS LOW HIGH 1. Strong case for support 2. Support in rare circumstances if (e.g. energy efficiency, hydro, a) Meets critical energy needs HIGH LOW geothermal, solar/wind in high-cost b) No lower-cost alternatives environments) available in time or to scale c) No alternative finance. Coal Screening Criteria still apply COST 3. Support under certain conditions 5. No case for support a) Concessional finance available to cover cost differential b) Strong country ownership 4. Support possible if strategic potential for technological innovation and global demonstration effects 9
WBG FY’14 Energy lending – Sectors US$m 3,500 3,301 3,000 2,500 2,320 2,000 1,667 1,500 1,000 806 491 500 313 - Renewable Energy Energy Efficiency Thermal Power Transmission and Other Energy Upstream, Oil Gas and (Including Generation Distribution Coal Hydropower) IFC MIGA World Bank
W HY ARE E NERGY SUBSIDIES ESTABLISHED ? Increase energy access – Low energy pricing aims to give poor population more access to energy. It also protects access to cleaner energy sources (e.g. LPG versus biomass) although it is not the most effective way to do so. Contribute in improving living conditions – Subsidies leave money in the pockets of consumers that they would otherwise not have to spend Protect national economy – Favors the development of energy-intensive domestic industries (e.g. petrochemicals, cement, etc.) Protect domestic firms form competitive pressure thus increasing country’s competitive advantage Subsidies are largely a political solution for economic problems – Drive government and politicians popularity – Keep a restive populace happy 10/22/2014 11
W HY REFORM IS NEEDED (IMF, 2013 A ) • Depress growth – reduce investment in the energy sector – crowd-out critical public spending – over-allocate resources to energy intensive sectors • Exert pressure on balance of payments of energy importers • Create negative externalities (for example, global warming) • Reinforce inequality 10/22/2014 12
Top 25 countries for energy subsidies Countries Subsidies in 2010 (billion USD) (IEA, 2011) • Worldwide energy Iran 80.8 Saudi Arabia 43.5 consumption subsidies Russia 39.2 estimated at $492 billion in India 22.3 2011 (IMF, 2013b) China 21.3 Egypt 20.3 Venezuela 20.0 UAE 18.2 • Worldwide producer subsidies Indonesia 15.9 estimated at $100 billion Uzbekistan 11.9 Iraq 11.3 (according to GSI) Algeria 10.6 Mexico 9.5 Thailand 8.5 • Worldwide subsidies estimated Ukraine 7.7 Kuwait 7.6 at $1.9 trillion on a ‘post-tax’ Pakistan 7.3 basis - factoring in the negative Argentina 6.5 externalities from energy Malaysia 5.7 Bangladesh 5.0 consumption (IMF, 2013b) Turkmenistan 5.0 Kazakhstan 4.3 Libya 4.2 Qatar 4.2 Ecuador 3.7 10/22/2014 13
Challenges of subsidy reform • Reform energy prices to reach cost recovery levels • While improving social protection… • …and allocation of resources • Ensuring the quality and reliability of energy supply • In order to sustain inclusive economic growth and shared prosperity 10/22/2014 14
ESMAP’s Energy Subsidy Reform and Delivery Facility (FY2014-2016)
Egypt: Energy Subsidy Reforms 16 16 ENERGY SUBSIDY REFORMS
Motivation: Energy subsidies are a significant fiscal drain 17 17 ENERGY SUBSIDY REFORMS
… crowd out social expenditures 18 18 ENERGY SUBSIDY REFORMS
…and impact a wide range of sectors directly and indirectly 19 19 ENERGY SUBSIDY REFORMS
Learn from other countries experience Dominican Indonesia Malaysia Iran Brazil Republican Lower-middle Upper-Middle Lower-middle Upper-Middle Upper-Middle Income Level Income Income income Income Income Electricity, Subsidized Electricity, Gasoline, Diesel, Gasoline, Kerosene, Electricity, LPG Fuels/Services Kerosene Electricity Diesel Gasoline, Diesel Phasing Out 2005: 2002 2008: 2008: 2010: (% GDP 3.5% of GDP removal of 3% of GDP in 1.3% in one year 15% in one year savings per in two years LPG subsidy one year year) Smart cards Smart cards, Conditional Conditional Unconditional Compensatory Unconditional cash transfer cash transfer public transport cash transfers measures cash transfers with a gas with a gas operators and 19.2 million 73 million component component fishermen Targeting Targeting Exclusion Exclusion Risks Black market Black market Errors and Errors and Leakage Leakage 20 20 ENERGY SUBSIDY REFORMS
Frame the immediate & medium-term activities Deploy smart card policies Mitigate the impact Cushion the blow 21 21 ENERGY SUBSIDY REFORMS
Fill Your Reform with Communication 22 22 ENERGY SUBSIDY REFORMS
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